The Role Personal Finance Classes Play in Repaying Student Loans

student loanThere’s no doubt about the financial hardships many Americans face today. In fact, these hardships – low savings or none altogether, overwhelming student loans and other loans in general not forgetting the constant search for “better” personal finance advice – all point to a need for personal finance education.

At the moment, several states require schools to add personal finance classes, but the real debate here is whether or not personal finance classes will improve people’s financial situations. Well, the answer may lie in one study that aimed to find out the effects of personal finance education on federal student loan repayment.

Daniel Mangrum, a Ph.D. candidate in economics was the man behind the study and hailed from Vanderbilt University. From his study, he concluded that students from states that required them to go through personal finance education were likely to start student loan repayment in a year.

According to the study, students who go through personal finance classes have a 2.5% higher repayment rates. However, it’s low-income and first-generation students who had the biggest effect – after attending personal finance classes, they recorded 5% higher repayment rates.

However, Mangrum attributed this improvement to the fact that these classes required students to apply for student aid programs. Therefore, it’s safe to say that students who get some form of personal finance education have an upper hand when it comes to repaying student loans and also managing any other debt in their future lives.

How the Study was Conducted

According to Mangrum, quality borrower data made it difficult to get a proper insight into student loans. However, Mangrum decided to use the College Scorecard’s data. This website collects and collates data from various universities regarding student loan repayment.

This is how he isolated various data sources. First, Mangrum grouped students according to their year of study. Next, he isolated students into two categories. Those that came from states that required personal finance classes and those who didn’t. Further, he calculated how multiple variations in the student body affected student loan repayment.

Next Gen Personal Finance is a nonprofit organization that advocates for personal finance education. According to the organization, residents of 24 states must go through personal finance classes – some going up to a year, with lessons touching on economics.

Should Every State Implement Personal Finance Classes?

According to Mangrum, having each state compel their residents to get some personal education may not be a cost-effective solution for improving student loan repayment. According to the results of Mangrum’s study, student loan improvement will see a 5% increase, which is quite modest.

To put this into perspective, this translates into a mere 30 extra students reducing their outstanding loan each year at a public university. Also, there’s the issue of the cost of implementing personal finance classes.

The solution? According to Mangrum, simplifying the federal student loan system is far cheaper than implementing personal classes and has far-reaching effects.

How to Repay Your Student Loan

1 Income-Based Repayment

This program is backed by the federal government and allows federal student loan borrowers to take out a certain percentage of their salary to pay their loan. For people with flexible work hours such as entrepreneurs and freelancers, this is a huge advantage because they can make a sizeable contribution toward student loan repayment.

Nevertheless, you must keep in mind that the interest rates on IBR will continue piling up. Therefore, to avoid this, consider paying more than the minimum amount every month.

2. Make Monthly Payments

Unlike IBR where there’s no fixed monthly payment, this plan allows student loan borrowers to make fixed monthly payments. This means you must make this payment regardless of whether you have a job or not.

It’s the default student loan repayment option but for a recent graduate hunting for a job or for someone who doesn’t have a stable income, this option may not be the best. However, if you have a steady flow of income and feel confident that you can meet these payments every month, then this is the best option.

If you consider going down this route, don’t forget about the interest. Similar to how interest will compound on the principal amount in IBR, you’ll also accrue interest despite making the monthly payments. Therefore, the best way out is to contribute as much as you can.

3. Refinance

This option is possible through private loan providers and may offer borrowers lower monthly interest rates. it’s also an excellent option for parents with federal Direct PLUS loans, which don’t qualify for income-driven repayment options.

It’s also an excellent option for borrowers that take out private loans to finance their college education. Some of the benefits of student loan refinancing will depend on your credit score and the affordability of the monthly payments.

However, if you refinance your student loan, prepare for drawbacks such as forgoing consumer protections, income-based repayment options, and flexibility offered by federal student loans.

Parents’ Role in Repaying Student Loans

The cost of college education continues to spike each year. This means more students are finding it difficult to realize their academic dreams and life ambitions altogether. Parents aren’t spared as well because as much as they’d want their kids to attend college, the costs prove to be a major obstacle.

However, there are ways parents can help their kids to get a college education. First, they can fill out the Free Application for Federal Student Aid (FAFSA) form. This program provides several college financing options and if you find you encounter any challenges when filling out the form, you can contact the Department of Education for an in-depth guide.

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